Moderate-Price Vs Upper-End Extended-Stay Hotel:
Is There a Profitable Niche?
Charts Comparative Rooms Department Profits and Payroll Expenses
Comparative All-Suite Profitablility
 
by Robert Mandelbaum - Oct 1998 

Let’s face it.  A main reason for the recent explosion of extended-stay hotel development is the historical success of this segment of the lodging industry.  Extended-stay hotels have always achieved occupancy rates and profit margins that far exceeded overall industry averages.  On the surface, these would appear to be very compelling reasons to enter the marketplace. 

However, the newest entrants into the extended-stay market are quite different from their predecessors.  Prior to the 1990s, an extended-stay hotel was pretty much defined by Residence Inns and comparably priced brands.  Although these hotels achieved average daily rates lower than other full-service all-suite or upscale full-service properties, they tended to be priced in the upper-end of their respective markets.  In fact, this pricing relative to other full-service hotels, combined with the full residential feel of the guest unit and property, represented one of the main competitive features for extended-stay hotels.  They are a positive price-value alternative for someone desiring to stay for an extended period of time and with the means to pay for the expanded accommodations. 

The current generation of extended-stay hotels, however, is dominated by properties that are priced in the mid- or lower end of their respective market areas.  Like their more expensive brethren, these moderate-price, extended-stay properties offer a residential-style guest unit, albeit with more modest furnishings.  However, unlike the upper-end extended-stay hotels, the moderate-price properties are designed to go after their niche target market of price-sensitive, extended-stay travelers. 

The question that has yet to been answered is the overall depth of the price-sensitive extended-stay market.  Given the relative newness of this type of hotel, little historical data is available to effectively measure the national appeal for these properties.  Future occupancies will certainly be the best indicator of the depth of demand for this type of property. 

Look At Middle, Not Just The Top Line 

Besides market support, a major reason for the historical success of extended-stay hotels is their ability to achieve high profit margins.  When operating as they were designed, that is, for capturing a high percentage of long-term stays, extended-stay hotels are extremely profit-efficient and bring a large percentage of dollars to the bottom line.  In 1997, the average operating profit margin (before capital reserve, debt service, rent, income taxes, depreciation, and amortization) for all extended-stay hotels was 44.8 percent.  This compares to an overall industry average of 30.0 percent and 37.7 percent for all-suite hotels.  The primary reason for reason for the efficiency of extended-stay properties relative to other hotels is the limited amount of services offered, combined with a low labor requirement. 

By not offering extensive food and beverage facilities or public spaces, upper-end extended-stay properties benefit from the same efficiencies of other limited-service hotels.  Historically, the upper-end, extended-stay properties enjoyed the benefit of low operating expenses, combined with a pricing premium over budget and mid-price properties.  What remains to be seen is if the newer moderate-price extended-stay properties can achieve these levels of profit margin without the pricing premium. 

Early indications show a struggle.  From our 1997 Trends in the Hotel Industry database, we analyzed the financial performance of the historically upper-end, extended-stay brands, compared to hotels operating under the more moderately priced, extended-stay affiliations.  (Due to the newness of the “budget” extended-stay brands, we do not feel our sample in this segment is representative for comparison at this time).  In 1997, enjoying the benefit of a premium in both occupancy and average daily rate, the upper-end, extended-stay properties were able to achieve an operating profit margin of 45.9 percent, compared to 43.0 percent for the mid-price, extended-stay hotels. 

Certainly 43.0 percent is an excellent profit margin.  However, a more telling story  comes through when operating profits are compared on a dollar-per-available-room basis.  The upper-end, extended-stay hotels achieved an average operating profit of $12,796 per available room, 57.8 percent greater than that achieved by the average mid-price, extended-stay property.  Assuming there is a correlation between profits per available room and supportable development costs per available room, it is doubtful that the average mid-price, extended-stay hotel can be developed for 58 percent less than an upper-end property on the same site. 

Built For Labor Efficiency 

Another success factor for the upper-end, extended-stay properties is the low cost of labor.  The limited amount of services offered, combined with lower occurrence of check ins/outs, allows for these hotels to operate with a minimum level of staffing.  Total payroll and related expenses for upper-end, extended-stay hotels averaged 20.8 percent of total revenue in 1997, compared to 31.1 percent for all hotels. 

Once again, the inability to achieve the rate premium of their higher-end cousins pushes the payroll percentage for the mid-price, extended-stay properties up slightly, to 21.9 percent.  To achieve their desired level of labor productivity, mid-price, extended-stay properties are even more dependent on a high percentage of long-term stays.  Unlike the upper-end, extended-stay hotels, the mid-price, extended-stay hotels often limit the frequency of housekeeping services and shut down the front desk at night.  If the mid-price, extended-stay hotels are not successful in penetrating and capturing price-sensitive, extended-stay travelers, then they stand to lose a large portion of the operating efficiencies they are designed for, and need to achieve, in order to be financially successful. 

Watch Those Costs 

As with all hotel developments, each individual deal needs to be examined for its own market and financial feasibility.  The analysis presented in this article is not intended to condemn the new breed of extended-stay hotels, nor dissuade someone from building one.  Instead, it is a warning not to assume that the historical performance of an upper-end extended-stay hotel in a market is automatically indicative of success for a more moderate-price facility. 

Due to the newness of the moderate-price, extended-stay hotel segment, no significant track record of market or financial data is available for analysis.  In the future, we might see that these properties are capable of “stealing” demand from the upper-end, extended-stay properties, or can effectively penetrate the economy and mid-market transient hotel market.  However, in the near-term, it does appear that the inability to enjoy the rate-premium cushion achieved by the upper-end, extended-stay properties does force the moderate-price, extended-stay properties to watch their operating expenses carefully. 
 
 

Comparative Rooms Department Profits and Payroll Expenses
 
All Suite Hotels
All Extended-Stay Hotels
Upper-End Extended Stay Hotels
Mid-Priced Extended-Stay hotels
Occupancy 74.3% 74.2% 81.1% 66.6%
Average Daily Rate $107.90 $83.04 $90.11 $73.44
Rooms Department Profit 75.9% 78.4% 80.0% 75.3%
Total Payroll and Related Expenses as a Perceent of Total Revenue 23.9% 21.0% 20.8% 21.9%
Total Payroll and Related Expenses Per Available Room $8,081 $4,979 $5,832 $4,131
Source: PKF Consulting, 1998 Trends in the Hotel Industry
 
 
Comparative All-Suite Profitablility 
Note: * Income before capital reserve, debt service, rent, income taxes, depreciation, and amortization.
 
All Suite Hotels
All Extended-Stay Hotels
Upper-End Extended Stay Hotels
Mid-Priced Extended-Stay hotels
Total Revenue Per Available Room $33,812 $23,710 $28,037 $18,865
Rooms Revenue as a Percent of Total Revenue 86.1% 94.7% 94.8% 94.6%
Operating Profits* as a Percent of Total Revenue 37.7% 44.8% 45.9% 43.0%
Operating Profits* Per Available Room $12,784 $10,584 $12,796 $8,108
Source: PKF Consulting, 1998 Trends in the Hotel Industry
 

Operating a moderate-price, extended-stay hotel offers it own set of unique marketing and management challenges, distinctly different than the historical experiences of the upper-end properties in this segment. 

* * *
Robert Mandelbaum is Director of Research for PKF Consulting, an international management consulting firm specializing in the hospitality industry.  He is located in the firm’s Atlanta office (404-842-1150).
 
* * *
 
For additional information contact 
Robert Mandelbaum at the firm:
email rmandel@pkfc.com
PKF Consulting
3391 Peachtree Road
Suite 420
Atlanta, GA  30326
phone  (404) 842-1150
fax  (404) 842-1165
 
 

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